Any entity which purchases goods and/or services on a regular basis will typically seek to maximize the amount of goods/services that it receives for a particular amount of cash outflow or money. Accordingly, from time to time such an entity may enter into new agreements or renegotiate existing agreements with various suppliers of goods/services in order to obtain the most favorable arrangements for purchasing. In these cases--when an entity has altered its supply arrangements--the entity may wish to measure how much has been saved, or lost, with respect to prior arrangements.
To measure savings, certain assumptions can be made with regard to the difference between an old contract and a new contract. For example, if an old contract stipulates a price of $150.00 per unit for a certain type of services or goods while a new contract stipulates a price of $135.00 per unit for the same type of services/goods, then it could be reasoned that $15.00 will be saved for each unit purchased under the new contract. This translates into a savings of 10% (i.e., 15/150) for each dollar spent on that type of services/goods under the new contract. The savings or benefits in actual dollars may then be derived by determining what amount of money has been spent under the new contract.
Previously developed techniques for determining or assigning an actual dollar amount to the benefit derived from new contractual arrangements, however, suffered from numerous problems. For example, these techniques did not account for the difference in time between the date on which goods and/or services were received and the date on which payment was rendered for the same, thereby producing, in some cases, inaccurate, imprecise, or incorrect conclusions regarding savings. This is more readily explained with reference to FIG. 1.
FIG. 1 illustrates an exemplary time line for various events surrounding the effective date of a new contract or supply arrangement. As shown in FIG. 1, a first set of services (services A) can be provided in the second, third, and fourth weeks of a first month under the old contract, and may be priced at an old contract price of $150.00 per unit. An invoice corresponding to services A is prepared and sent out at the end of a first week of the next (or second) month. If services A comprises ten (10) units, then the monetary amount of the corresponding invoice is $1500.00 ($150.00 per unit.times.10 units). Payment for this invoice for services A is made approximately thirty days later during the first week of the following or third month. A second set of services (services B) are provided during the first and second weeks of the third month; services B are priced at a new contract price of $135.00 per unit. An invoice for services B is prepared, and then sent out at the end of the second week of the third month. If services B comprises fifteen (15) units, then the monetary amount for this invoice is $2025.00 ($135.00 per unit.times.15 units). Payment of the invoice for services B is rendered during the third week of the third month. At the end of the third month, a spending report for that month is generated. This spending report may specify a single lump sum of $3525.00 ($1500.00+$2025.00) that represents payment for both services A and services B during the third month.
According to some previously developed techniques for determining the benefit derived from new contractual arrangements, savings were calculated as a straight percentage of a spending report. With reference to the example of FIG. 1, if the new contract becomes effective at the end of the third week of the second month, then prior techniques would calculate that $352.50 (10%.times.$3525.00) was saved under the new contract. However, this amount is not very accurate because some of the monthly spend amount was attributable to payment for services A, which were priced at the higher rate under the old contract. Thus, because spending reports do not reflect which goods or services were provided prior to the effective date of the new contract (e.g., services A) and which goods or services were provided after such date (e.g., services B), the figure derived under prior techniques could misrepresent actual savings.
From the above, it can be seen that with previous techniques, the flow of spending, and accordingly, savings under a new contract, could not be discerned with any real degree of accuracy. Thus, an entity was not able to determine how much it saved under any new arrangements with a supplier.